ChoicePoint's Smith is at a crossroads

The highest form of recognition for employees at Alpharetta's ChoicePoint Inc. is the Gorilla Award, personally presented by Chairman and CEO Derek Smith.

But now the gorilla is on Smith's back. Alpharetta-based data warehouser ChoicePoint is under fire across the country from politicians and consumer advocates for a 2004 breach that may have put the most personal information of 145,000 people in the hands of identity thieves. News broke March 2 of yet another -- and very similar -- breach that occurred in 2002.

The crisis has cost ChoicePoint's shareholders more than $400 million, with its stock (NYSE: CPS) falling from $45.49 on Feb. 14 (the day before the breach was made public) to $40.67 on March 2. The company had 88 million shares outstanding as of March 2004.

For 49-year-old Smith, who last year published two books about protecting against identity theft, the breach itself is damning enough. But the breach also raises serious questions about the handling of the crisis by Smith's lieutenants, as well as ChoicePoint's board -- a who's who in the defense, retail and banking world that includes Wal-Mart Stores Inc. Vice Chairman Thomas M. Coughlin, former U.S. deputy secretary of defense John Hamre, The Home Depot Inc. co-founder Kenneth Langone and the former chairman of Bank One Corp., John B. McCoy. Home Depot co-founder Bernard Marcus served on ChoicePoint's board until last April.

That high-profile board will face tough questions ahead, observers say: Should Smith resign his chairmanship and focus more on his CEO role? Should he have any role? Who, if anyone, should take the fall?

During the week of Feb. 28, Smith was unavailable to answer questions, said ChoicePoint spokeswoman Kristen McCaughan. She asked for all questions to be sent via e-mail but later said the company could not answer any of them.

Under Smith's leadership, ChoicePoint has become one of the biggest and most powerful data warehousers since spinning off from credit reporting company Equifax Inc. in 1997.

Smith, who made $8 million in salary and compensation in 2003, beneficially owned 3.2 million shares of ChoicePoint stock as of February 2004. At ChoicePoint's March 2 closing price, they would have been worth $130 million.

"He's at a crossroads in terms of rebuilding trust and confidence in his organization," said Jim Boone, managing partner at executive search firm Windship Partners. "If he can do that, then he'll survive. If he can't show that decisive leadership, he and the board will have to look at other alternatives."

Smith is known as a man who enjoys bucking the system. For example, he refuses to wear socks, saying his shtick is a throwback to his days at Equifax, which had a strict dress code policy. Not liking "mindless" rules, Smith has said, he found a glitch in the policy: It didn't mention anything about socks.

Smith, who is described by some close to him as a hands-off leader, has been distant during the crisis. One person who knows Smith, who asked not to be identified, called Smith "Mr. Outside," referring to his lack of focus on the inner workings of the company.

Smith has said he did not know of the breach until January. In addition, during the week following ChoicePoint's announcement of the breach, Smith was out of the state conducting business not related to the crisis, spokesman Chuck Jones said.

One observer compared Smith's seemingly hands-off approach to that of former The Coca-Cola Co. CEO Doug Ivester, who reacted slowly during one of the company's worst crises ever, a health scare in Belgium in 1999 that prompted a $250 million recall.

On March 2, following news of the second breach, ChoicePoint said: "We regret any consequences consumers may experience. We are doing everything we can to inform and assist those consumers who may have been impacted."

"Finally, at the very least, the leadership has accepted blame," said Ramnath Chellappa, an electronic privacy specialist and professor of information systems at The University of Southern California. "I would give them a barely passing grade."